Why Celsius Stock Plunged 52% Last Year

Shares of energy drink company Celsius (NASDAQ: CELH) plunged 51.7% in 2024, according to data provided by S&P Global Market Intelligence, which is bad enough. But in the opening months of the year, the stock was up 76%. This means that while it dropped 52% for the year, it dropped a whopping 73% from its high point in 2024.

Rumblings of a problem began after Celsius reported financial results for the first quarter of 2024 in May. The company missed expectations for revenue -- rare for this high-growth business. Management mentioned that its largest customer, which is PepsiCo through a distribution agreement, was having inventory management issues. Otherwise, its Q1 revenue would have lived up to expectations.

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Investors mostly shrugged off this concern at the time. But as the year rolled on, it was clear that this inventory issue was a major headwind for Celsius. And by the third quarter of 2024, the company's revenue plunged 31% year over year. This was the first time it posted negative growth since 2018.

Going from recent triple-digit growth to a revenue decline got investors' attention. They've been selling Celsius stock, dropping it to its lowest price-to-sales valuation in nearly five years.

Data by YCharts.

This problem for Celsius isn't uncommon

With supply chains, there's a phenomenon known as the bullwhip effect. Supply chains involve multiple parties, but eventually end with a customer. A small spending change with customers can cause more pronounced adjustments with each link in the chain as it makes its way back to the originator. And that seems to be what's happening here.

In recent years, Celsius rose from obscurity to having the third-largest market share in the energy drink space. Revenue was doubling in a single year. But consumers cut back on spending on energy drinks in 2024, which seems to have caught Pepsi off guard. It overestimated the requisite inventory to keep up with consumer demand. It made a more pronounced adjustment to correct its error, leading to Celsius' revenue drop.

Unfortunately for shareholders, Celsius was on the wrong end of the bullwhip.

What should Celsius investors do?

Stoic investors would ideally cut through the present noise to size up the long-term opportunity for Celsius. That said, that's not a simple task in this case. It's increasingly difficult to discern whether Celsius' products are still resonating with consumers. If it's losing ground to rivals, that's concerning.

For its part, Celsius says that its products are indeed still resonating with consumers, which is good. The company says its Q1 market share was 11.4% compared with 12.1% market share year-to-date as of Q3.

Assuming that Celsius doesn't have a consumer demand problem, then 2025 could provide some promising upside. The company is still expanding into new sales channels as well as entering new markets. These new opportunities could surprise investors by getting its growth back on track.

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Jon Quast has positions in Celsius. The Motley Fool has positions in and recommends Celsius. The Motley Fool has a disclosure policy.